Section 173 - Mutual Credit and Set-Off under the Insolvency and Bankruptcy Code, 2016
Section 173 sets out how a bankruptcy trustee must account for mutual dealings between a bankrupt individual and a creditor, determine the net amount payable and exclude certain debts arising with notice of a pending bankruptcy application.
Text of Section 173 - Mutual credit and set-off
173. (1) Where before the bankruptcy commencement date, there have been mutual dealings between the bankrupt and any creditor, the bankruptcy trustee shall—
(a) take an account of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set-off against the sums due from the other; and
(b) only the balance shall be provable as a bankruptcy debt or as the amount payable to the bankruptcy trustee as part of the estate of the bankrupt.
(2) Sums due from the bankrupt to another party shall not be included in the account taken by the bankruptcy trustee under sub-section (1), if that other party had notice at the time they became due that an application for bankruptcy relating to the bankrupt was pending.
Official reference: Insolvency and Bankruptcy Code, 2016 - India Code (official Act PDF). See also the Insolvency and Bankruptcy Board of India (IBBI) for the legal framework and notifications.
Meaning of mutual credit and set-off
Mutual dealings are transactions giving rise to reciprocal financial obligations between the same bankrupt person and creditor. Set-off means adjusting the amount owed by one against the amount owed by the other, so that the bankruptcy estate or creditor deals with the net balance rather than two separate gross claims.
Bankruptcy trustee means the insolvency professional administering the bankrupt's estate under the Code. The bankruptcy commencement date is the date on which the bankruptcy order is passed by the Adjudicating Authority, as defined under the Code.
Section 173(1): Trustee's duty to calculate the net balance
Under clause (a), the trustee must identify the amounts due in both directions from mutual dealings before the bankruptcy commencement date and set one amount against the other. Under clause (b), only the difference is recognised: either as a debt that the creditor may prove in bankruptcy or as a sum payable to the trustee for the bankruptcy estate.
Illustration of set-off
| Transaction | Amount |
|---|---|
| Bankrupt owes Creditor A | Rs. 1,00,000 |
| Creditor A owes bankrupt | Rs. 65,000 |
| Net bankruptcy claim of Creditor A | Rs. 35,000 |
Assuming both debts qualify for set-off and no statutory exclusion applies, Creditor A may prove the net Rs. 35,000 rather than the gross Rs. 1,00,000. If the amount owed by Creditor A were greater, the excess would instead be payable to the bankruptcy trustee.
Section 173(2): Exception where a bankruptcy application was pending
Sub-section (2) prevents a particular amount owed by the bankrupt from being included in the set-off account if the other party had notice, when that amount became due, that a bankruptcy application concerning the bankrupt was pending.
This is a specific statutory exclusion. Its application depends on evidence of the timing of the debt, the pending application and the creditor's notice. It should not be interpreted as a blanket prohibition on all mutual set-offs once a bankruptcy petition is filed.
Practical steps for creditors and bankruptcy trustees
- Identify all reciprocal dealings and the parties to each obligation.
- Establish when each amount became due and the bankruptcy commencement date.
- Check whether the creditor had notice of a pending bankruptcy application when any relevant amount became due.
- Exclude amounts caught by Section 173(2), then calculate the permissible net balance.
- Record supporting invoices, agreements, statements and communications for proof of debt or recovery by the estate.
Related provisions and scope
Section 173 appears in Part III, Chapter V of the Code, concerning the administration and distribution of the estate of a bankrupt individual. Section 171 addresses proof of debt; Section 172 addresses proof of debt by secured creditors; and Section 174 addresses distribution of interim dividends. The rules for set-off in corporate liquidation or corporate insolvency resolution should not be assumed to be identical to Section 173.
For the broader statute, visit The Insolvency and Bankruptcy Code, 2016.
Frequently asked questions
Is set-off mandatory under Section 173?
Section 173(1) uses the word "shall" when directing the bankruptcy trustee to account for and set off qualifying mutual dealings, subject to the exclusion in Section 173(2).
Can a creditor claim the full gross debt after set-off?
For qualifying mutual dealings, only the net balance is provable as a bankruptcy debt under Section 173(1)(b).
Does Section 173 apply automatically to every corporate insolvency?
No. Section 173 belongs to the bankruptcy provisions in Part III. Corporate insolvency and liquidation have their own statutory framework and applicable regulations.
Legal note: This article is general information, not legal advice. The applicability and commencement of Part III provisions can depend on the category of debtor and relevant notifications. Verify the applicable law and procedural rules for the particular case.